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Your Take: Do You Trust Financial Advisers?
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I don’t trust financial advisers. I’m not entirely sure why but I inherently do not trust experts in any non-science field and I have my fraud radar on red alert if it has anything to do with money.
I separate financial advisers into two categories – those that help you plan and those that help you invest. I see some value in the ones that help you plan for the future. You sit down with the planner, list your financial goals, and come up with a financial plan that helps you achieve those goals. They provide another perspective on your situation and can give advice as to what has worked for others and what has not. While I’m sure that’s a simplification, that’s the basic idea.
Then there are those who help you invest. They can recommend a basket of investments to help you achieve your goals or they directly manage your money. The advantages of using an adviser like this is that you can stay hands off while they invest your money on your behalf. They can do the research, buy a diversified portfolio, and help you an area you may be weak in. Whether they’re fee only and provide only direction or commission, where they earn a percentage of assets, the end result is that you’ve outsourced the work.
So why do I not trust them? First, I don’t think I need someone to help me plan our financial future. While I’m certainly not an expert on the subject, I feel that sitting down and setting a plan with an “expert” isn’t going to be any better than if I sat down with a book on financial planning. As for giving my money to someone or taking the advice of an adviser for investing, I don’t see how that beats going with a mutual fund. Since they don’t have a crystal ball, are their recommendations going to beat a mutual fund managers? If I go safe with an index fund and opt for a lazy portfolio, will I really be that far behind? If the majority of actively managed mutual funds, staffed with the best and the brightest working on this 24/7, can’t beat the index… can an adviser?
Let me know what you think, hopefully I haven’t kicked over a hornet’s nest! (or maybe it’s good if I do, I don’t know what I don’t know so I’d love to hear another perspective)
(Photo: unlistedsightings)
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They are certainly on the list of “people who could scam you” but certainly not as high as lawyers and insurance salesmen.
I guess it depends on what they are selling and how they get paid.
Not all of them are out to get you, but you can’t put your guard down.
I built my portfolio using ETFs and borrowed from models based on the efficient frontier that are to be found at Index Fund Advisors (ifa.com) who themselves have a very compelling offer based on a great set of funds from DFA (a leading provider of index funds only available through advisers). My expenses are very low, and i sleep just fine at night… Interestingly, IFA has a lot of investor education resource and shows one how to build a portfolio of ETFs vs. buying their services.
Most are just trying to sell you their product. A few good apples do exist though.
There are plenty of good financial advisors of both types. There are plenty of incompetents too. It’s a fallacy to thing that since funds on average don’t beat the market that the brightest and best are running funds that don’t beat the market. The brightest and best are beating the market, and some of the funds are losing to the market. Can you pick which funds (and which managers) are which? I dunno, but it’s silly to think they are all equal.
Saying that I have 90+% of my own portfolio in index funds and play around with the rest of it myself…
You don’t trust them because they have an inherent conflict of interest. However, if you can find an advisor (or planner) that charges a flat or hourly fee, you can trust them more, because they get paid for their knowledge, not their sales. But that is not the only factor. You have to account for the individual, too. It’s tricky.
I do not have a lot of trust in financial advisers either. Well, maybe it’s more in the fact that I do not trust that much money in the hands on an individual or organization that does not have a lot to lose if they lose all of your money.
I agree, no one cares more for taking care of your money than you do. And comissioned advisors are biased by the fact that they get paid not to get you the best investment but to get you to invest. They may still be trustworthy and honestly seek to get the best for you to get you to come back but it’s still a bias that must be considered.
I don’t really trust financial planners, since they have to sell you something to make their money its not in their interest to use your money to buy and hold. I know where I want to go with my finances and with all the information on the internet I can figure out how to get there without a planner.
Hum, some people must trust them because it is a large field. I think that if you do not have the time or the interest and have money to invest a financial advisor may be the best way to go. Its everything in life, if it seems too good to be true, it probably is… so you have do your research to pick a good one. Just my two cents.
Equating quantity to trust (or quality) for these individuals is far from likely. There a plenty of lawyers but they are not known for building trust.
The quantity of them simply points to a market being available (people who know of investing but are intimidated or lack knowledge) and a low bar to enter the field (put a resume with a 4yr degree on a career website and you will get an offer from a financial adviser company – even if you are physicist).
Hmm… I really can’t imagine needing one. Maybe I just don’t have more finances than I can handle?
This is an important topic and one that I think needs to be discussed openly and honestly.
I am a financial advisor and put my clients’ interests first in all matters. I know that I do a good job for my clients, but of course that is subject to opinion.
The larger issue, I think, is that as an industry financial services and its advisors haven’t done a good job of earning and keeping the trust of the public.
Whether it’s Bernie Madoff or a large Wall Street firm taking a leading role in creating some the current economic mess we’re dealing with, it doesn’t take many of these “bad apples” to spoil the bunch.
I’m not going to ramble on in defense of the value I provide, but I’m interested to see other people chime in about this and hopefully see some other advisors weigh in too.
I will say that I think the value of a trustworthy advisor isn’t in setting a plan or investing money. It’s in helping people make the necessary adjustments to their plan as they experience the inevitable changes coming from the markets and/or their personal lives.
How can an individual properly select a financial adviser based on quantitative measures?
These questions will be directed to you, but would as easily be asked of the profession in general…
Do you have a degree in finance or a related field?
Do you have any nationally accredited certifications?
What did you do before becoming a financial adviser?
What type of continuing education do you participate in?
How do you rate your performance year to year?
As a UK based Financial Planner I’m interested in this healthy discussion. Many people don’t need a financial adviser. In my (free) first meeting with a prospective client I’m trying to ascertain whether I can add any value or not, and if not, I’ll tell them and we part company.
For those whose affairs are complex enough to need help, the best way is to look for a fee-based CFP, and agree fees up front which are not dependent on him selling you a product. That way, his interests are more aligned with yours.
As is often the case, our profession is tarnished by a history of commission-hungry salesmen and, in the UK at least, mis-selling scandals. We are cleaning things up slowly, and I know many fine professionals who live for their clients’ well-being. As ever, personal recommendation is the best way to find a financial planner, if you need one.
My thoughts:
a.) I would only ever go to a flat fee advisor, and would walk out the room if anyone every tries to sell me a life insurance in this context
b.) I have the DIY approach better and with an MBA and some experience feel like I know half-way what I am doing. That said, if my assets reach critical mass, I will at some point engage a financial advisor, more as thought partner, not someone to blindly hand my money over.
Jim,
I read your blog most every day and enjoy your commentary. First, full disclosure: I work for the Garrett Planning Network (a group of 300 fee-only, hourly financial advisors) and I’m also a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®) and run my own fee-only, hourly Registered Investment Adviser firm.
I agree that most people don’t need a full time financial planner, but I think most everyone can benefit greatly from periodic, professional advice, if even just a second opinion to ensure they’re on the right track.
I also agree that you and most readers of this blog are probably doing fine on your own, but you all have a great interest in, and knowledge of, personal finance and investments. Many people either a.) aren’t interested in personal finance and/or b.) don’t know the difference between STD and LTD insurance or term vs. UL insurance or a Roth IRA vs. a Traditional IRA or a mutual fund vs. an ETF… for those folks, I truly feel we can provide tremendous value!
Regarding investments specifically, I have a very passive, index, buy-and-hold investment philosophy and educate my clients as to why that’s the best way to go, in my opinion. So I’m not trying to beat mutual fund managers (and believe very few, if anyone in the world, can beat an index consistently), but I feel that I can provide tremendous value in educating them about passive investing, heIping them set up an initial asset allocation and subsequent rebalancing.
-Justin Nichols
It’s funny. Just yesterday, I asked my husband if he thought we needed to meet with a financial planner because we haven’t in a while. His response was, “for what? They’re not going to tell you anything that you don’t already know”. I’m skeptical of financial planners. For the most part I’ve been very unimpressed with financial planners. So many try to sell people investments/insurance while knowing the client is drowning in debt. That annoys me. A few years back, my husband had a load of student loan debt that needed to be paid off (we’ve recently paid off that debt, and besides the mortgage have no other debt). We were looking for financial planners and met with many. Only two told us they wouldn’t recommend any investment beyond our 401k/403b until the student loan debt was paid off. All the others kept trying to sell us investments and annuities. I read A LOT of books on finances, investing and follow a lot of financial blogs. Generally, I don’t find that financial planners add much value beyond what I already know. I’m always searching for that one planner that will give me some super compelling financial advice unlike anything I’ve ever heard or read to help us grow our money and make wise investments, but I always feel disappointed when we meet with someone.
I don’t tend to trust commission sales people who try to sell you their high fee products which you don’t need and that is really what many (most?) financial planners really are.
I wouldn’t have a problem trusting a “fee only” financial planner (like Justin above) who gets no commission and doesn’t work for a particular brokerage or mutual fund or insurance company.
I think most people can benefit from a financial planner just like most people can benefit from help & advice when doing their taxes.
I think consulting a ‘fee only’ planner is a good idea. Sometimes we may have blind spots that an objective eye for our situation. A professional may also ask important questions we haven’t considered. I would never consult a planner without first asking for references and how much the consults costs.
this. only via direct references withpeople i trust would i trust someone who has any say with my money.
I have had two experiences with FP’ers.
First time was on a fee bais (so I thought). He strongly encouraged me to go with two funds. Turns out one had a front load of 7% and the other was a heavily back loaded anuity. When I asked him about the 7%, he said everyone knows that front loaded funds do better! (Yes, i bought the Brooklyn Bridge).
The second time was with a commissioned FP. He tried to push me into annuities which I have come to hate with a passion.
Two bad apples to say the least.
Having said that, my brother has used one to great success and I have a friend who has really dome well with another.
Point is you have to be somewhat educated if you plan to use one, otherwise you are at risk.
Bill Snider
I agree with others who have suggested going with a fee-only planner and would avoid a planner who wants a % of your portfolio to manage it for you.
I think the % of assets manager job has managed to stick around so long because the vast majority of people get nervous when talking about money/investments. Then a planner steps into the picture and says he will take care of everything for them and they won’t have to worry about a thing, all for the low price of 1-2% your portfolio balance annually. Of course these same people have no idea how a 1-2% drain on your return will kill you over time and they think they are getting a great deal.
Nothing will change until more people get comfortable educating themselves and taking care of things themselves. It is mind boggling to think of some of things people used to pay for (having someone pump your gas for you) or still pay for (paying someone to fill out your 1040 EZ tax form and file it).
I once had a Prudential Mutual Fund account where the “advisor” wanted to meet with me several times a year to adjust my portfolio. I went once realized what a waste of time it was. It was basically a pitch to buy insurance. Stay away.
As a longtime PF blogger, I’ve never felt the need for a financial planner because there’s very little I can’t research on my own in my current situation. As I get older and the finances get more complex, though, I might see the need for one.
Conversely, however, very few of my friends are interested in their financial futures in a healthy way beyond: make “enough” money, pay off their debt, buy new toys/cars/houses. Some are more educated than others, but by and large, they don’t know 1/2 of the things I do about basic retirement planning, goal setting, the current markets for savings accounts, online banking, competitive financial anything. And so I help them very very cautiously from what I know, and would actually enjoy doing that professionally if I could serve my clients’ interests well and always to the best of my abilities. (I’ve little interest in being an investments sales FP, though.)
Most of my intelligent, driven and well-educated cohort cannot and will not personally handle their finances in an in-depth fashion. There’s no way to force the desire to do so on them, either. In those cases, I can see where they would benefit from engaging a reputable and trustworthy financial planner in the future when they’re no longer just newly-graduated professionals and students.
I don’t trust anyone who will make a commission off of selling a product to me. I recently opened up a Chase checking account (for a $100 bonus), and the personal banker was VERY intent on me opening up savings and credit card accounts as well. It had to be that day, through him–though no disclosure of commissions, of course. I almost said, “I’ll do it–if you’ll split your commission with me.”
If I don’t know what I’m doing, have a busy schedule, etc; I believe in letting the professionals handle it with some due diligence, until at least I pick up some knowledge.
But when it comes to finances, I trust both, financial planners and advisors. There is a reason why they’re in the profession, to make money and help us make money. At the end of the day I always have the option; I have the right to say ‘yes’ or ‘no’ to their suggestions. In the past it’s been beneficial, the knowledge I picked up is/was priceless. I’ll continue to bounce ideas off planners & advisors.
I agree with many of you that a fee only advisor makes the most sense…in principle. But I’ve never been able to reconcile the economics of fee based advising in my mind.
For an advisor to gross $150K, they would have to have 300 customers willing to pay them $500 for their advice over the course of the year. Office space, equipment, marketing, licenses, taxes, benefits and salary have to come out of that gross. I would expect that the retention rate would be no more than 50%, so that means they would have to attract 150 new customers every year to make a modest living (by Financial industry standards).
And do you think fee based advisors would be the best and brightest? I would guess that Wall Street would attract those with the greatest talents, so these advisors would be those who couldn‘t get a job with the brokerages or funds. My low opinion has been confirmed by advisors (fee and commission based) that I‘ve personally met (although I admit that’s a statistically insignificant sampling).
So perhaps someone can tell me why a savvy financial person would be interested in entering this field? If I could understand this, maybe I would be more open to using their services.
I don’t trust Financial Advisors since I have seen what they have done to my parents by pushing high fee, poor investment choices. Now that I have been learning more about my money, I can ask better questions to an advisor if I choose to get one.
You can never know if the planner takes fiduciary responsibly seriously.
I’m sure there are some planners who do just that, how can you know if you have found one?
There are almost zero salespeople who don’t place their commissions ahead of the interests of the client. And that’s especially true on Wall Street.
I’d avoid them like the plague – unless you are simply incapable of doing it yourself.
Financial advisors have one thing on their mind making money for them and you are correct they will tell you nothing you can’t find out for yourself in a relatively short time.
Also one thing is for sure any package they sell you i.e. insurance plans etc. will be loaded at the beginning so you have to pay for a long time before you even start to make an investment.
Seriously you could watch Bloomberg TV for a couple of weeks and make equally informed choices yourself and build a portfolio which will perform as well as theirs if not better and no set up costs, also you have the choice to take it out when the market is greedy and wait for the inevitable correction and bingo in you go again, it takes up a short amount of your time and is really a lot of fun.
Just remember the old adage get out early if you spend your life disappointed that you took your stocks out early then you will make money.
Does the writer trust that his dentist is choosing the best treatment for him or the dentist? Or the mechanic the least expensive repair. Everyday we make decisions based on what professionals in every industry tell us. Some are honest pros others are con men.
Think you know how to plan your financial future better than a professional who has spent countless hours learning about tax structure, insurance, investments, legal and medical risks.
Now are we supposed to invest years of learning and give it all away because someone doesn’t want to pay a commission? Not anymore than a doctor will give you a free operation.
I meet people like this frequently and the real joy of being an insurance agent is when I expose their ignorance of their own finances to them.
I might be wrong but…. if a financial planner was a guru why would they be sitting behind some desk working at some firm? Get it… if you can pick’m, you’d be loaded! You wouldn’t be sitting behind a desk peddling your services to the masses. Just my thought…
1,2 , 3 or 4% difference year on year.. sure does add up if you understand time value of money … I think there is a big difference between an advisor investing money for you and an advisor who wants to sit down and understand your goals first….
If you consider brokers your friend, try closing out your account only to see a 25% deduction in overall account balance when rolled over to another company.
The problem with index funds is “Geometrical Mean” for the researchers in the group. If you lose 50% one year, it then requires 100% gain just to get back to even. So, its not always about “beating the index” its about limiting downside risk. When the market goes down 50, and the pro’s only lose 30, over time that adds up.
As far as 4% upfront fees vs no fees, doesn’t it make sense to pay 4% in yr. 1 on 100k investment and no fees along the way, no fees to change funds, and no fees to get out….or more sense to pay .85% in c shares every year on a growing portfolio for 30 years??
Investments are like tools. If you try to drive a nail with a saw, its probably going to produce less than desired results. If you try to cut a board with a screwdriver, same result.
Using a good financial advisor who has spent years getting a finance mba,CFP and hundreds of hrs a month staying up to date on current tax laws, opportunitys like the roth conversion, estate planning advice etc etc. can be very helpful. Not to mention, large wirehouses have access to bond inventory and other products at rates discounted vs. what the retail consumer pays.
And as the post above said, you don’t expect to get an operation for free, or even more simple…even a free car wash…why would you expect me to give away 20 yrs of education for free? I agree fees are best to avoid, but if I charge .5% and my returns are 2% higher than the market and I save you literally hundreds of hrs of time….I deserve to be compensated.
Final though…im sure I can mow my yard and edge with the best of them, but for the 20 bucks I pay once a week, its worth the 4hrs and pain in my ass it saves me!
J
Like Javi, I am horrified at what financial planners have done for my parents.
My parents inherited a modest amount of money from my grandfather. Not being familiar with investing, they consulted a financial adviser. The adviser did not encourage them to invest the money over several months or talk to them about the tax advantages of IRAs. Instead, she simply told them to put their money in a fund that came with a 4.75% front load.
Disgusting.
John, no index fund should be charging an expense ratio of .85%, and you haven’t supported your claim that the pros do better than the market on the downside. I certainly haven’t seen that in my parent’s case.
Sarah, Im sorry to hear your parents had a poor experience. I am not however arguing pros such as your local ed jones or merrill advisor do it better than an index fund. I am referring to pros such as Bill Gross and Jeremy grantham. You are correct, if given the option of buying a vanguard large cap equity fund vs. paying an advisor 1.5% to pick individual large cap equities for your portfolio, the lower fee account wins 100% of the time. My point was this: Studies have shown that over 90% of portfolio returns come from asset allocation and only 10% from individual security selection. If you are smart enough to know what percentage to put in stock vs. bonds. vs large, mid and small cap vs. domestic, foreign, currency, comodities etc. etc…..then sure, pick your vanguard funds and move in and out of them at the perfect time and save .5%. Reballance weekly yourself oh and at the end of each year calculate the capital gains and losses of every individual fund you own and sell in an efficient manner to harvest all the losses to offset the gains. Oh, and make sure you have enough money to invest in 5-10k securites to make sure you are well diversified.
My point is this, just because one advisor didnt know what he was doing doesn’t mean the rest of us who do aren’t better than an index fund.
Back to your 4.5% statement…If they planned to buy that position and hold it for 20 years, a 1 time fee upfront on the lower value makes sense. If it was short term money, I would be pissed. the .75 number came from the difference in return from a 4.5% A share fee vs. the no fee C share.
After being a financial advisor for more than 30 years, I am consistantly amazed. People think that its a product that is the financial solution. Some people accuse us FA’s of not looking out for the client. While I agree that there are good ones and bad once out there, here is what I got to say. I am a trusted advisor. Why, because I have a financial tool that most people never hear of. A financial simulator! I also have the ability to reduce financial risk. I teach people how money works.
Nobody should ever have to worry about the stock market and the risk. It’s the transfers of wealth through unintended consequenses that if reduced or eliminated, will increase a clients wealth. In the world of financial advisors, I guess you could say that I am a protection specialist.